Recruitment paused Self-employment, unemployment and health

Reference:
ERIM PHD 2018 ESE RT JH

Abstract

Unemployment is a major concern for both labor force participants and for policy makers. Employers may be reluctant to hire unemployed individuals, since unemployment may be viewed as a sign of low ability, and self-employment can be an important route for the unemployed to (re-)enter the labor force. The unemployed are indeed more likely to become self-employed than wage worker. At the same time health is a factor that determines entry into self-employment. There is a health barrier for entry into self-employment since healthy individuals are, for example, more likely to recognize promising start-up opportunities and have greater confidence in their skills to run a business successfully which enhances their likelihood to become self-employed. Health may be a particular concern for the unemployed (e.g., health can be a factor that contributed to their unemployment status) which makes it important to investigate the relation between unemployment and health and how this affects self-employment entry, performance and exit. This is exactly the focus of the current research. Important questions to address are: How do different aspects of health (e.g., physical and mental health) affect self-employment entry and performance of the unemployment? Are those who experienced a prior spell of unemployment more likely to exit self-employment and what is the role of health in this?

Keywords

Occupational choice, labor market entry, labor market performance, labor market exit, entrepreneurship economics and health economics.

Topic

The research focuses on self-employment, unemployment and health. Self-employment is an important and growing labor market category accounting for approximately 16% of the labor force in the Europe (Eurostat, 2015). Hence, it is important to understand determinants of entry and performance in self-employment. Unemployment is a major concern both for labor force participants and for policy makers. In many countries, governments have developed policies to support unemployed individuals in becoming self-employed, for instance by providing start-up subsidies for unemployed individuals to create their own ventures or by providing them with other types of support such as business advice. Self-employment warrants scholarly attention as an important labor market option for the unemployed. Health is vital for labor market outcomes such as occupational choice, earnings and exit. A new and growing stream of research focuses on self-employment and health and has found that the self-employed are on average healthier than wage workers (e.g., Rietveld, Van Kippersluis and Thurik, 2015; Rietveld, Bailey, Hessels and Van der Zwan, 2016).

The goal of this PhD project is to investigate and understand the joint impact of unemployment and health on self-employment entry, performance and exit. The thesis will build upon prior research in our group that investigates the link between self-employment and unemployment and between self-employment and health.

Regarding self-employment entry, this research will make use of the occupational choice framework to understand its link with unemployment and health. According to occupational choice theory individual’s choice between self-employment and wage employment depends on the expected utility of both alternatives as well as on the opportunity costs (e.g., the wage that an employee has to give up). This theory assumes individuals act rationally (rationality assumption) and only become self-employed if the utility (net of opportunity costs) they expect to derive from self-employment exceeds that from wage employment. Individuals not only derive utility from earnings but also from non-monetary aspects. Occupational choice theory has been used in prior studies to predict entry into self-employment, either by labor force participants in general or by wage workers. Because the opportunity costs of self-employment are likely to be different for unemployed and wage workers, it is not at all straightforward that the decision process to become self-employed is the same for these two groups of workers. Furthermore, within self-employment, income depends more on the ability to work than in wage-work, and health is likely to be accounted for in the calculation of the expected utility from self-employment. This makes it likely that it is less desirable for unhealthy individuals to become self-employed.

Unemployment and health could also affect self-employment performance. For example, those who were formerly unemployed often have lower human capital levels than those who did not experience an unemployment spell which could adversely affect their performance in self-employment. Health is likely to enhance performance. Although self-employed individuals are on average healthier than wage workers, within self-employment the formerly unemployed possibly suffer more from health problems (e.g., the unemployment spell may have resulted from physical or mental health problems or may have caused mental strain) than others. This makes it interesting to investigate the interplay between unemployment and health for performance in self-employment.

With respect to self-employment exit, health problems are an important cause for individuals to go out of the labor force and possibly also to exit self-employment. The formerly unemployed may also be at a greater risk to fail in self-employment (e.g., because they lack the necessary experience and skills). Thus, health and prior unemployment status may jointly be of great relevance for predicting exit from self-employment.

Relevant questions to consider in this research are:

  • To what extent does health form a barrier for entry into self-employment among the unemployed?
  • What macro-economic circumstances (such as unemployment benefit schemes) influence this relationship?
  • Do the formerly unemployed perform worse in self-employment due to health problems?
  • Which health conditions are associated with exit from self-employment (into unemployment)?
  • Are the unemployed at a larger risk to become unemployed again and what is the role of different health aspects in this?

Although the pressure to become self-employed may be stronger for the unemployed relative to wage workers, there is no clear encompassing view yet regarding the types of the unemployed, e.g., in terms of health characteristics, who are especially likely to actually become self-employed nor on the impact of prior unemployment status and health on performance and exit in self-employment. This study makes several important contributions to the literature. First, there is an extensive literature on determinants of self-employment entry, exit and performance, but so far little is known about the role of prior labor market status (i.e. unemployment, wage employment) for self-employment. This means a move away from studying entry and performance of self-employment in general to studying entrepreneurial career decisions and outcomes based on individual’s prior labor market statuses. Second, by considering different aspects of health and its relation to unemployment, our study also contributes to the scarce but growing stream of research on self-employment and health which suggests that substantial health differences exist between the self-employed and wage workers and that health is an important factor to consider for determinants and outcomes of self-employment.

Supervisory Team

Roy Thurik
Professor of Economics and Entrepreneurship
  • Promotor
Jolanda Hessels
Associate Professor of Economics and Entrepreneurship
  • Daily Supervisor